Apple's international pricing

A few years ago I had the idea of using iTunes song prices to form an index to illustrate whether currencies were under- or over-valued. The iTunes index indicated significant over valuation of currencies relative to the US dollar in a way that was not correlated with the Economist’s Big Mac index. While this may have been tied up with an unusually low price for iTunes songs in the US, the relative prices across other countries were still puzzling. In contrast to the usual presumption on price discrimination, the higher the average income of the country, the lower the iTunes song price. The same was true for iPod games.

Today, Horace Dediu provides a careful analysis of pricing for Apple’s hardware (e.g., the graph to the left). It reveals continuing puzzles but none so much as Apple TV. Apple TV is 25 percent more expensive in Finland as you would expect. But in Finland the amount of content you can purchase is far more limited than the US. That makes it objectively less valuable. A similar case can be made for iPads that also are more expensive there. So why would Apple set prices so high?

One explanation, of course, is that Apple cares most about the US market and basically prices goods elsewhere at a higher price to stop parallel importing. This is borne out a little with respect to iPad pricing in Brazil. There, Apple appears to engage in some discounting but not so much that, taking local taxes into consideration, someone would find it profitable to import to the US from Brazil.

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5 Replies to “Apple's international pricing”

You’re going to have to explain that one to me more slowly. Why do they need a higher price in Finland to stop Americans from sourcing Finnish products?

I can imagine a case for it where supply constraints combined with reluctance to hike prices for the high demanders mean excess demand in the States for short periods. Does the product price patterning bear this up? I don’t know which ones were in excess demand in the States over the period.

I can think of at least two reasons off the bat: First, because Apple TV in Finland is less useful, Finns who do buy Apple TV have a really important reason to do so, and it gives Apple the ability to charge more (to sell fewer goods). In economics speak, the product has become more differentiated, and it gives Apple higher monopoly power over prices. Or (actually similarly to above), more simply, they know that they will sell less, so they seek higher profits per unit at less volume.
I am a Korean currently staying in US for a year, and I was considering buying a IPod Classic and IPad in the US rather than in Korea during October of this year. It turned out that effective exchange rate for IPod would have been a bit above 1400 won per dollar, and IPad would have been around 1200 won per dollar. Actual exchange rate of won-dollar at the time was around 1150 won per dollar. I bought the IPod and held off the IPad.

At least from the standpoint of someone sitting in one of those high-priced countries (Apple prices were insane here (Japan) 20 years ago; presumable they are less crazy today), it looked much more to be that pricing decisions were made by the local distributor, not Apple USA. In the Apple Japan case, it looked to me that they decided they had a small captive market of Apple fans who would pay much higher prices and that lower prices wouldn’t bring in significant numbers of additional sales. Some people would drag Macs back with them from trips to the states, but lack of service and Japanese language documentation made that not an option for most.
If the Finland distributor for Apple TV sees the same lack of price elasticity, then their profits increase up to the point that the elasticity kicks in again, i.e. the point that customers decide that it just ain’t worth the extra money.
So my hypothesis here is that it’s local, but pretty standard, economic considerations driving prices.

Your explanation can’t be right. It would be sufficient to equalize (net) prices across countries. In Italy, France and Germany a 4gs Iphone (16GB) costs about 710 bucks (at a conservative 1.30 exchange rate and tax free.) That’s $50 more than what you can get in the U.S.. If fact Apple faces the opposite problem, all of my friends and relatives who go to the US import apple products.

The gap can’t be demand driven for obvious reasons. And all these items are shipped from china anyway. A $50 gap in shipping costs would be implausible as well.

My own take draws drom a paper by W. Pesendorfer on fashion cycles:
“Fernand Braudel (1981) notes that fashion resulted to a large extent from the desire of the privileged to distinguish themselves, whatever the cost, from
the masses that followed them.” So sometimes higher prices mean higher sales.

I believe that these considerations have a relative lower weight in the US…

I imagine the reason for the Apple TV being more expensive in Finland is simple enough. The Apple TV is designed as a device through which you can buy digital content from Apple. Therefore, they sell the box at a relatively low profit margin with the expectation that revenues will be generated from content sales. In Finland, content sales will be lower, so the margin on the Apple TV will be higher to compensate.